Investors should have been more skeptical, Cuesta Title attorney says

Investors who were allegedly cheated by developer Kelly Gearhart and hard money lender Jay Miller knew they were making risky investments, an attorney told a jury Thursday, but they didn’t question how their money was being spent because they had enjoyed big profits from Miller’s firm.

“They loved the 12 percent (return on their investment),” said attorney Mack Staton. “They didn’t really appreciate the risk until the bubble burst.”

Staton is representing Cuesta Title, an escrow company that is being sued — along with Stewart Title of California and its sister company, Stewart Title Guaranty — by a group of eight investors who say the title companies conspired with Gearhart and Miller to commit fraud involving real estate investments. Several other related lawsuits have been filed, but this is the first to go to trial.

In the civil suit, filed in San Luis Obispo Superior Court, the plaintiffs claimed that they gave money to Miller, who invested in real estate projects with multiple developers, including Gearhart. Cuesta and Stewart, meanwhile, handled the escrows.

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But instead of creating new developments, the plaintiffs allege, Gearhart used the money to pay other investors. Cuesta and Stewart, they allege, failed to disclose the scheme.

Investors have focused on Cuesta Title officer Melanie Schneider, who lived in Gearhart’s guest house for a while and eventually moved in with Gearhart’s brother. But during his opening statement, Staton pointed a finger at investors for not being more skeptical of the investments, and at Gearhart and Miller, who he said perpetrated the frauds.

“Miller/Hurst and Gearhart are the bad guys,” Staton said. “The evidence will show that Jay Miller and Kelly Gearhart didn’t need anybody else to pull this off.”

Gearhart has been indicted on 16 counts of fraud and money laundering. Miller pleaded guilty to four counts of fraud and money laundering in federal court.

Neither is expected to testify in the civil trial.

Many of the investors were friends with Miller, Staton said, and had enjoyed good profits with him for years.

“They were anxious to continue to earn,” he said. “They got lulled into a sense of security.”

As the company handling the escrow, Staton said, Cuesta was only allowed to follow the instructions of the parties — Miller and Gearhart. They were not allowed to interfere with transactions, analyze the deals or change the terms.

Meanwhile, he said, it was Miller who deceived investors and Gearhart who misused the funds Miller gave him.

“Cuesta had no knowledge of any fraud, and there was no agreement to commit fraud,” he said, noting that Cuesta Title made roughly $300 from each escrow.

The investors gave Hurst Financial, the firm Miller headed, power of attorney and ignored a written warning that the loans entailed risks, he added. Only one talked about the investment with a financial adviser.

Such Ponzi schemes usually entice investors by offering higher returns than other investments. But perpetuation of the high returns requires a continual flow of money from new investors to keep the scheme going.

When the real estate market crashed, Staton added, the flow of money stopped, and the scheme became apparent.

“Common sense will show the real estate bubble played a very large role in this mess,” Staton said.

Gerard Kelly, an attorney representing Stewart, agreed with Staton, saying the title companies had no knowledge of the fraudulent activity.

“These are good companies trying to do the best they can,” he said. “The wrongdoers are not in this courtroom.”

Hurst has since closed, Gearhart moved to Ohio and Cuesta is no longer operating.